Mehmet Simsek, a former Turkish finance chief popular among foreign investors, has taken the helm of the economy again, signalling a return to more orthodox economic policies.
The United Kingdom-educated Simsek, a former strategist at London-based Merrill Lynch, was appointed treasury and finance minister on Saturday as Turkish President Recep Tayyip Erdogan announced his new cabinet after winning the May 28 presidential run-off that extended his rule for five more years and into a third decade.
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Turkey is in the midst of a cost-of-living crisis stemming from soaring inflation, which peaked at 85.5 percent in October compared with a year ago before easing to 43.7 percent in April with a favourable base effect.
Analysts largely blame the crisis on Erdogan’s unorthodox economic strategy of low interest rates and credit expansion with increasing state control on financial markets that the government says it pursued to push investments, production, exports and growth.
The Turkish lira has lost some 150 percent of its value in the last two years as the country’s $900bn economy came under immense pressure amid depleted foreign reserves, a swiftly increasing current account deficit, and a snowballing state-backed scheme of lira deposits protected against the currency’s depreciation.
The lira lost about 23 percent of its value since the beginning of this year and stood at a record low of nearly 21 against the United States dollar on Sunday.
‘Transparency, consistency, predictability’
Simsek, 56, who was finance minister between 2009 and 2015 and then deputy prime minister until July 2018, is a market-friendly figure known to foreign investors as an advocate of conventional economic policies, transparency and an independent central bank.
He said during a handover ceremony on Sunday that the country “has no other choice than to return to a rational ground” and that a “rules-based, predictable Turkish economy will be the key to achieving the desired prosperity”.
“Transparency, consistency, predictability and compliance with international norms will be our basic principles in achieving this goal,” he said, adding that among the main targets was “establishing fiscal discipline and ensuring price stability for sustainable high growth”.
Seref Oguz, a senior economist and columnist, said the negotiations between Simsek and Erdogan for the position took a long time because the former wanted to secure his conditions before accepting.
“Simsek put forward three conditions to get on board with the position,” Oguz told Al Jazeera.
The first condition, according to Oguz, was the authority to make his own decisions. The second was to be able to design the country’s economy teams, and the third was for him to be given adequate time to fix the economy’s problems.
Local and international media started reporting about talks over Simsek’s possible reappointment before the first round of the presidential elections on May 14.
After none of the candidates could secure more than 50 percent of votes for an outright victory, media close to the government intensified its reporting on a likely nod for Simsek provided Erdogan remained in power.
Addressing his supporters after his election victory on May 28, Erdogan said that he would have “internationally reputed finance management”, in an apparent reference to his former minister.
Hence, foreign investors already knew that Simsek’s appointment was highly probable before Saturday’s announcement.
Erdogan named Cevdet Yilmaz – another cabinet member who backs orthodox economic policies – as Turkey’s vice president.
Simsek said on Sunday that the government’s main purpose is to increase social welfare in Turkey.
Ceyhun Elgin, a professor of economics at Istanbul’s Bogazici University, said Simsek is expected to pursue a monetary policy aiming for low inflation rather than credit expansion and growth.
“This means there will be higher policy interest rates to fight inflation,” he told Al Jazeera.
Elgin added that the new minister would not abolish the lira deposits scheme protected against foreign currencies amid depleted foreign currency reserves, but that he might do so “after Turkey’s foreign reserves reach a certain level with the influence of increasing interest rates”.
The indirect state controls on the lira’s exchange rate against foreign reserve currencies are expected to be gradually lifted, Elgin said, leading to controlled depreciation of Turkey’s currency.
Erdogan is known for his belief that high interest rates are the cause of high inflation, not the cure for it.
“Interest and inflation are directly proportional. Interest is the cause, inflation is the effect. There may be people who do not believe this, but this is what I believe,” the president said earlier this year.
Simsek said that it was vital for Turkey “to reduce inflation to single digits again in the medium term … and to speed up the structural transformation which will reduce the current account deficit”.
Turkey’s central bank, the independence of which is seen to have eroded over time, has cut its policy rate to 8.5 percent from 19 percent since late 2021 because of Erdogan’s economic views.
The lira deposit scheme protected against the currency’s depreciation was launched in 2021 in an attempt to keep the lira valuable. It now holds the equivalent of about $125bn.
Erdogan has also followed a policy of credit expansion, at times utilising public banks to provide loans with extremely low borrowing costs, which skyrocketed purchases of properties and cars among other consumption in the last few years.
Oguz said Simsek’s name and appointment are important for Turkey to attract foreign investment, but that investors will want to see the autonomy and authority of the new finance chief.
“Therefore, the first 100 days of Simsek are crucial, in which we will see what authorities he will be able to use, and how he will oversee or change the economy-related positions, including the chief of the central bank,” Oguz said.
He added: “The investors will, in particular, watch the actions that will be taken on the interest rates and lira’s exchange rate, which was kept valuable up until now, but is slowly being released to depreciate against the dollar.”